Fin.2

Question 1

Bond Duration

Answer 1

the duration of a financial asset measures the sensitivity of the asset’s price to interest rate movements, expressed as a number of years.

Question 2

PV01

Answer 2

The present value impact of 1 basis point move in an interest rate. It is often used as a price alternative to duration (a time measure). It is also known as DV01 (Dollar Value of 1 basis point).

Question 3

Convexity

Answer 3

A measure of the curvature of how the price of a bond changes as the interest rate changes.

Question 4

Delta

Answer 4

Measures the sensitivity to changes in the price of the underlying asset. The Œî of an instrument is the mathematical derivative of the option value V with respect to the underlyer’s price.

Question 5

Gamma

Answer 5

Measures the rate of change in the delta. The Γ is the second derivative of the value function with respect to the underlying price. Gamma is important because it indicates how a portfolio will react to relatively large shifts in price.

Question 6

Vega

Answer 6

Measures sensitivity to volatility. The vega is the derivative of the option value with respect to the volatility of the underlying.

Question 7

Theta

Answer 7

Measures sensitivity to the passage of time. Θ is the negative of the derivative of the option value with respect to the amount of time to expiry of the option.

Question 8

Interest Rate Swaps

Answer 8

The exchange of a fixed rate loan to a floating rate loan. The life of the swap can range from 2 years to over 15 years. The reason for this exchange is to take benefit from comparative advantage.

Question 9

Currency Swaps

Answer 9

Involves exchanging principal and fixed rate interest payments on a loan in one currency for principal and fixed rate interest payments on an equal loan in another currency.

Question 10

Total Return Swaps

Answer 10

A swap in which party A pays the total return of an asset, and party B makes periodic interest payments.The total return is the capital gain or loss, plus any interest or dividend payments.

Question 11

Basis Swaps

Answer 11

An interest rate swap which involves the exchange of two floating rate financial instruments denominated in the same or different currencies. A floating-floating interest rate swap under which the floating rate payments is referenced to different bases.

Question 12

Zero coupon swap

Answer 12

an interest rate swap in which one party makes regular payments while the other party makes one lump sum payment, typically at the end of the contract.

Question 13

Overnight Indexed Swaps (OIS)

Answer 13

a fixed / floating IR swaps with the floating leg tied to a published index of a daily overnight rate reference.

Question 14

3 types of repo maturities

Answer 14

1) Overnight refers to a one-day maturity transaction
2) Term refers to a repo with a specified end date
3) Open simply has no end date

Question 15

Sell/buy back Repo

Answer 15

the spot sale and a forward repurchase of a security. A repo is technically a single transaction while a sell/buy back is a pair of transactions (a sell and a buy).

Question 16

Eurodollar deposit

Answer 16

Deposits made in U.S. dollars at a bank or bank branch located outside the United States.

Question 17

European option

Answer 17

an option that may only be exercised on expiration.

Question 18

American option

Answer 18

an option that may be exercised on any trading day on or before expiration.

Question 19

Bermudan option

Answer 19

an option that may be exercised only on specified dates on or before expiration.

Question 20

Duration

Answer 20

a linear measure or 1st derivative of how the price of a bond changes in response to interest rate changes.

Question 21

Macaulay duration

Answer 21

The weighted average time until cash flows are received, and is measured in years

Question 22

Modified duration

Answer 22

The percentage change in price for a unit change in yield (Price sensitivity)

Question 23

Zero-coupon bond

Answer 23

A bond bought at a price lower than its face value, with the face value repaid at the time of maturity. It does not make periodic interest payments, or have so-called coupons

Question 24

DV01 / BPV / PV01

Answer 24

the ratio of a price change in output (dollars) to unit change in input (a basis point of yield)

Question 25

Yield to Maturity

Answer 25

The internal rate of return (IRR, overall interest rate) earned by an investor who buys the bond today at the market price, assuming that the bond will be held until maturity, and that all coupon and principal payments will be made on schedule